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Buy-side vs. sell-side analysts’ earnings
Chapter 12, Problem 90E(choose chapter or problem)
Problem 90E
Buy-side vs. sell-side analysts’ earnings forecasts. Refer tothe Financial Analysts Journal (Jul./Aug. 2008) comparisonof earnings forecasts of buy-side and sell-side analysts,Exercise 12.74 (p. 712). Recall that the Harvard BusinessSchool professors used regression to model the relativeoptimism (y) of the analysts’ 3-month horizon forecasts.The following model was fit to data collected on 11,121forecasts: E(y) = β0 + β1x1 + β2x2 + β3x3, where
x 1 = {1 if the analyst worked for a buy-side firm, 0 if theanalyst worked for a sell-side firm}
x 2 = number of days between forecast and fiscal year-end(i.e., forecast horizon)
x 3 = natural logarithm of the number of quarters the analyst had worked with the firm
a. The coefficient of determination for the model wasreported as R2 = .069. Interpret this value.
b. Use the value of R2 in part a to conduct a test of theglobal utility of the model. Use α = .01.
c. The value of β1 was estimated as 1.07, with an associatedt-value of 4.3. Use this information to test (α = .01.)whether x1 contributes significantly to the prediction of y.
d. The professors concluded that “after controlling forforecast horizon and analyst experience, earnings forecasts by the analysts at buy-side firms are more optimistic than forecasts made by analysts at sell-side firms.”Do you agree?
Questions & Answers
QUESTION:
Problem 90E
Buy-side vs. sell-side analysts’ earnings forecasts. Refer tothe Financial Analysts Journal (Jul./Aug. 2008) comparisonof earnings forecasts of buy-side and sell-side analysts,Exercise 12.74 (p. 712). Recall that the Harvard BusinessSchool professors used regression to model the relativeoptimism (y) of the analysts’ 3-month horizon forecasts.The following model was fit to data collected on 11,121forecasts: E(y) = β0 + β1x1 + β2x2 + β3x3, where
x 1 = {1 if the analyst worked for a buy-side firm, 0 if theanalyst worked for a sell-side firm}
x 2 = number of days between forecast and fiscal year-end(i.e., forecast horizon)
x 3 = natural logarithm of the number of quarters the analyst had worked with the firm
a. The coefficient of determination for the model wasreported as R2 = .069. Interpret this value.
b. Use the value of R2 in part a to conduct a test of theglobal utility of the model. Use α = .01.
c. The value of β1 was estimated as 1.07, with an associatedt-value of 4.3. Use this information to test (α = .01.)whether x1 contributes significantly to the prediction of y.
d. The professors concluded that “after controlling forforecast horizon and analyst experience, earnings forecasts by the analysts at buy-side firms are more optimistic than forecasts made by analysts at sell-side firms.”Do you agree?
ANSWER:
Step 1 of 5
Harvard Business School professors used regression to model the relative optimism (y) of the analysts’ 3 month horizon forecasts. The following model was fit to data collected on 11,121 forecasts:
(i.e., forecast horizon)
had worked with the firm.